Will banks suf­fer from the es­ca­lat­ing trade ten­sion?

Some also flagged po­ten­tial damp­en­ing ef­fects on in­vest­ments and busi­ness sen­ti­ment as early as the sec­ond quar­ter of 2018.

Singapore Business Review - - ANALYSIS: BANKS -

Sin­ga­pore’s com­mer­cial bank­ing sec­tor is fir­ing on all cylin­ders, as seen from the strong Q118 re­sults of DBS, OCBC, and UOB, and we are pos­i­tive on the sec­tor’s out­look over the com­ing quar­ters. Healthy loan growth, stable as­set qual­ity, and well-cap­i­talised bal­ance sheets are tail­winds for the city’s banks.

Cause for op­ti­mism

We re­main op­ti­mistic on the prospects of the Sin­ga­pore com­mer­cial bank­ing sec­tor over the com­ing quar­ters as it is likely to ben­e­fit from rel­a­tively healthy loan growth, stable as­set qual­ity, and ro­bust cap­i­tal ad­e­quacy. In­deed, Sin­ga­porean banks are per­form­ing well, ac­cord­ing to Q118 re­sults re­leased by the city’s three big­gest lo­cal banks, DBS, OCBC, and UOB. Their re­spec­tive net prof­its grew by 26% y-o-y, 14% y-o-y, and 21% y-o-y to $1.5b, $1.1b, and $978b. The eq­ui­ties of th­ese three fi­nan­cial in­sti­tu­tions have also achieved strong gains, av­er­ag­ing 36.4% in terms of price in­crease over the past 12 months, and they re­main on an up­trend.

Data from the Mone­tary Au­thor­ity of Sin­ga­pore showed that to­tal credit ex­ten­sion via DBUS (rep­re­sent­ing loans de­nom­i­nated in Sin­ga­pore dol­lars) ex­panded by 5.4% y-o-y in March (ver­sus 5.6% y-o-y in De­cem­ber 2017), and we are fore­cast­ing credit growth to come in at 6.4% in 2018. Loans to busi­nesses (which ac­count for roughly 60% of over­all credit) will con­tinue to be the key driver over the com­ing quar­ters.

Whilst growth in the man­u­fac­tur­ing sec­tor will likely mod­er­ate, the Sin­ga­pore govern­ment’s ex­pan­sion­ary bud­get for 2018 will likely pro­vide con­sid­er­able sup­port, as the govern­ment re­mains com­mit­ted to planned in­fra­struc­ture up­grades to en­sure that Sin­ga­pore is able to main­tain its com­pet­i­tive­ness, Con­struc­tion and build­ing loans ac­count for 18.5% of over­all loans, and are likely to re­cover from the

0.4% y-o-y con­trac­tion in March as up­grad­ing pro­jects are rolled out over the com­ing months.

In ad­di­tion, the ser­vices sec­tor con­tin­ues to ex­pand at a steady rate, sup­port­ing re­lated loans. In­deed, Sing­stat’s Q218 Busi­ness Ex­pec­ta­tions (Ser­vices Sec­tor) sur­vey showed that a net weighted bal­ance of 8% of firms ex­pect more favourable busi­ness con­di­tions for the pe­riod from Aprsep 2018 com­pared with Oct 2017Mar 2018 (ver­sus 3% in the pre­vi­ous sur­vey).

Fur­ther­more, Sin­ga­pore’s prop­erty sec­tor is show­ing some signs of pick­ing up due to pent-up de­mand, and this is likely to pro­vide sup­port to hous­ing and bridg­ing loans, which ac­count for 30.5% of over­all loans (and more than 75% of all con­sumer loans). In­deed, the over­all URA pri­vate res­i­den­tial prop­erty price in­dex rose by 3.9% q-o-q and 5.4% y-o-y in Q118 (ver­sus 0.8% q-o-q and 1.1% y-o-y in the pre­vi­ous quar­ter)

Stable as­set qual­ity

Sin­ga­pore banks have largely moved past the is­sue of de­te­ri­o­rat­ing as­set qual­ity due to the stress fac­ing the oil and gas sec­tor amidst a re­cov­ery in the global crude oil prices, and we ex­pect non-per­form­ing loans (NPL) to re­main largely stable over the com­ing quar­ters. Ac­cord­ing to the fi­nan­cial re­ports of

DBS, OCBC, and UOB, the av­er­age NPL ra­tio for th­ese three banks re­main gen­er­ally low, and fell to

1.57% in Q118 from a high of 1.64% in the pre­vi­ous quar­ter. With as­set qual­ity sta­bil­is­ing, this sug­gests that the amount of loan loss pro­vi­sion­ing that banks have to set aside over the com­ing quar­ters will be lower, which should be pos­i­tive for prof­itabil­ity. In­deed, the av­er­age al­lowances to non-per­form­ing as­sets de­clined to 85.4% in Q118 from 104.5% in Q217, as banks have also taken ad­van­tage of a switch to a new ac­count­ing stan­dard that al­lowed banks to draw down funds from their gen­eral pro­vi­sion re­serves to cover large al­lowances for cer­tain soured loans. The risks to our bank­ing sec­tor out­look is weighted to the down­side, mainly due to es­ca­lat­ing trade ten­sions be­tween the US and China. Sin­ga­pore’s small and open econ­omy makes it sus­cep­ti­ble to changes to the global trade out­look, and a po­ten­tial trade war could sig­nif­i­cantly dampen ex­ports, eco­nomic and loan growth, and could also re­sult in wors­en­ing as­set qual­ity. From BMI Re­search

A trade war be­tween the two largest economies in the world will have a big, neg­a­tive im­pact on Sin­ga­pore.

Healthy loan growth, stable as­set qual­ity, and well-cap­i­talised bal­ance sheets are tail­winds for the city’s banks.

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